Market Analysis

The US Treasury bond market was down earlier today (slightly higher yields/rates) and is now flat. The Fannie Mae and Freddie Mac mortgage-backed securities (MBS) have been relatively flat but are improving slightly in afternoon trading. The stock market is up.

Below are the key items on this week’s economic calendar:

Monday, November 23, 2009

• October Existing Home Sales – up 10.1% vs projections of a 1.4% increase.
• $44 Billion 2 Year US Treasury Note Auction - the auction results were strong with a 3.16 bid/cover ratio ($3.16 in bids for each $1 being auctioned). The bid/cover ratio of 3.16 was down from 3.63 from October’s $44 Billion auction, but is still far above the long-term average of 2.33.

Tuesday, November 24, 2009

• 1^st Revision 3^rd Quarter GDP - expected to be revised down from 3.5% to 2.8%.
• September S&P Case-Shiller Home Price Index – expected to show year over year prices down approx 9% from 11.32% in August.
• November Conference Board Consumer Confidence Index – expected 47.0 vs 47.7 in October.
• $42 Billion 5 Year US Treasury Note Auction
• Minutes of Federal Reserve Board’s Nov 3-4 meeting released – investors will be looking for any signs that the Fed may continue its mortgage-backed security purchase program.

Wednesday, November 25, 2009

• October Personal Income/Spending/PCE Index – Income expected up .2% vs September unchanged. Spending expected up .5% vs September down .5%. PCE (personal consumption expenditure) Index up .1% vs September up .1%.
• October Durable Goods Orders - expected .5% increase vs 1.4% in September
• Initial Jobless Claims week ended 11/21 – expected down 5,000
• October New Home Sales – expected up 1.9%
• University of Michigan/Reuter’s Consumer Sentiment Index – expected 67.0 vs early November 66.0
• $32 Billion 7 Year US Treasury Note Auction

Mortgage rates continue to sustain levels that are not supported by economic realities. The primary investor purchasing mortgages continues to be the Federal Reserve and they are electing to purchase mortgages at levels that are pricing out all other investors. This effort has the effect of forcing investors who would normally purchase Agency debt (mortgage-backed securities issued by Fannie Mae and Freddie Mac) to purchase US Treasury securities or invest in stocks. While the Federal Reserve program to purchase mortgages officially is set to end in March of 2010, they are expected to begin tapering off their purchases sooner than that. There are some who project that the Federal Reserve will both extend and expand their mortgage purchase program. However, even if they were to do this, rates would still most likely increase due to the fact that they will need to print more money on top of a mountain of debt that the Treasury is on schedule to auction in 2010. The combination of running the printing presses further and of bombarding the credit markets with record amounts of US Treasury auctions week after week will almost inevitably finally cause us to reach a point where more rational “pricing” of US Treasury and Fannie and Freddie debt will occur and we will experience a sudden move to higher rates. For now, we need to take advantage of these historically low rates.

Below is a recap of the economic calendar for this week:

Monday, November 30, 2009

November Chicago PMI (Business Barometer Index for the Chicago area) – up to 56.1 vs last month 54.2 and expectations for a 53.0 reading.

Tuesday, December 1, 2009

November Institute of Supply Management (ISM) Manufacturing Index – expected 55.0 vs October 55.7 (anything over 50 signifies growth in the manufacturing sector).

October Construction Spending – expected down .4% vs September up .8%

October Pending Home Sales – expected down .3% vs up 6.1% in September

Wednesday, December 2, 2009

ADP Employment estimate – expected 155,000 private sector job losses in November

Thursday, December 3, 2009

Revised Qtr 3 Productivity & Unit Labor Costs – productivity expected up 8.6% vs prior estimated increase of 9.5%. Unit labor costs expected down 4.2% bs prior estimated decrease of 5.2%.

Initial jobless claims week ended 11/28 – expected up 14,000

November Institute of Supply Management (ISM) Service Sector Index – expected 51.5 vs last month 50.6

Friday, December 4, 2009

November Nonfarm Payroll Report – expected job losses in range of 100,000 to 130,000 and unemployment rate flat at 10.2%.

October Factory Orders – expected up .2% vs September up .9%

The US Treasury Market is down slightly but Fannie Mae and Freddie Mac Mortgage-Backed Securities (MBS) are holding steady.

In economic news, initial jobless claims for the week ended 11/21 were down by 35,000 which was much better tha the 5,000 expected decrease.  October's Personal Income increased .2% which matched expectations and Personal Spending increased .7% vs .5% expected.  October's Personal Consumption Expenditure Index (PCE), which is a measure of inflation at the consumer level, increased .2% vs .1% expected increase.  October Durable Goods Orders were down .6% which was worse than the .5% expected increase.  The University of Michigan/Reuter’s Consumer Sentiment Index was 67.7 vs expected 67.0.  October's New Home Sales increased 6.2% which was much stronger than the 1.9% expected increase.

The bond market improved during the day as the US Treasury's 5 Year Note Auction received stronger demand than expected.  The bid/cover ratio was 2.81 which was the strongest since September 2007 when the auction size was only $13 billion (this November's auction was $42 billion).

In economic news, 3rd Qtr GDP was revised down to 2.8% which matched expectations.  The September S&P Case-Shiller Home Price Index showed year over year declines in home prices improving to be down 8.5% which was better than the 9% projected year over year decline. The 3rd Qtr was up 3.1% as we have seen steady improvement in the Home Price Index as the year has progressed.   The November Conference Board Consumer Confidence Index came in at 49.5 vs expected 47.0.  The minutes of Federal Reserve Board’s Nov 3-4 meeting provided some news that could have been interpreted negatively by bond investors.  The Fed projected slightly better unemployment rates in 2010 than previous forecasts.  Also the Fed referenced the decline in the US dollar and indicated they would be watching it should it's drop begin to steepen or should it begin to put significant upward pressure on inflation.

Stocks are down today (Dow down approx 140 pts) and US Treasury notes are improved.  Mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac are flat. 

In economic news, Initial Jobless Claims for the week ended 11/17 were unchanged.  Analysts had expected an increase of 2,000.  The Conference Board's Index of Leading Indicators was up .3% (vs expectations of a .4% increase).  The Philadelphia Fed's General Business Conditions index was up to 16.7 (vs expecations of a 12.0 reading).    The Mortgage Banker's Assocation reported that 9.6% of all mortgages are delinquent (1 payment or more late).  However, the 9.6% does not include loans that are in foreclosure.

On a separate note, yesterday Fannie Mae released a forecast that mortgage originations would drop 30% in 2010 due to lower refinance volume as a result of rising interest rates. Fannie Mae is forecasting a 10% increase in home sales in 2010.

Both bond markets and stock markets are slightly worse today.  We are seeing more volatility in the US Treasury market which is not longer being supported by Federal Reserve purchases than in the Fannie Mae and Freddie Mac Mortgage Backed Security (MBS) market.  The Federal Reserve has now used just over $1 Trillion of the $1.25 Trillion committed to MBS purchases.  There are some who are reading between the lines of Fed Chair's Bernanke's comments yesterday and believing that the Fed will extend their MBS program.  Should they do this, it would have the effect of continuing to keep mortgage rates .5% to 1% lower than they would be otherwise.  If, however, the Fed begins to communicate to the market that they do not plan to expand their $1.25 Trillion program (due to expire in March 2010), we will see an adjustment back up over 5% for the 30 yr fixed and then would most likely see a steady climb back up to the higher's 5's and possibly low 6% range in 2010.

In economic news, October's Producer Price Index (a measure of inflation at the wholesale level) came in below analyst's expectations at .3% increase (vs expectations of .5% increase and a .6% decrease in September), with the core rate (excluding food and energy) down .6% (vs expectations of a .1% increase and a September decrease of .1%).  In a separate report, October's Industrial Production came in up .1% (vs expecations for an increase of .4% and a .7% increase in September).  Capacity Utilization came in at 70.7% which was exactly what analysts were expecting.  This was slightly higher than the 70.5% Capacity Utilization for September.

US Treasury Bonds improved today with the yield on the 10 year Treasury moving down to 3.33%. Mortgage-backed securities (MBS) issued by Fannie Mae and Freddie Mac initially appeared to enjoy the momentum but scaled back towards the end of the day to end just barely positive. Equity markets had a very good day with the Dow moving up 136 points to 10,406.

Below is a recap of the economic calendar for this week:

Monday, November 16, 2009

October Retail Sales - Up 1.4% vs projections of a .9% increase and a 1.5% decrease last month. Excluding autos, up .2% vs projections of a .4% increase and a .5% increase last month.

Empire State Mfg Survey (General Business Condition Index for the New York Region) - 23.51 for November vs projections of 29.0 and last month reading of 34.57.

September Business Inventories - Down .4% vs projections of a .8% decline and an August decline of 1.5%.

Ben Bernanke Speech to the Economic Club of New York - Fed Chair Bernanke said that he did not believe the US economy was going to deteriorate further (as some analysts are predicted) but that the recovery would be very slow and that job grown in 2010 will be very meager.

Tuesday, November 17, 2009

October Producer Price Index (PPI) - Expected up .5% vs September down .6%. Core rate (excluding food and energy) expected up .1% vs September down .1%.

October Industrial Production - Expected up .4% vs .7% increase in September

Capacity utilization expected up to 70.7% vs September 70.5%.

Wednesday, November 18, 2009

October Consumer Price Index (CPI) – Expected up .2% vs September up .2%. Core rate expected up .1% vs September up .2%.

October Housing Starts – Expected up 1.7% vs September up .5% with permits up .9% vs 1.2% decline in September.

Thursday, November 19, 2009

Initial jobless claims for the week ended 11/17 – expected up 2,000 vs last week down 12,000

Conference Board Leading Indicators for October – expected up .4% vs 1% increase in September.

Philadelphia Fed Survey (General Business Conditions Index for the Philadelphia Region) – expected 12.0 vs September 11.5.

Friday, November 20, 2009

Economic calendar is vacant.

While the US Treasury market is relatively flat, the market for Fannie Mae and Freddie Mac mortgage-backed securities (MBS) continued to improve this morning.  In economic news, the Univ of Michigan Consumer Sentiment index fell to 66 (vs expected 71.0).  Also the trade deficit for September increased to $36 billion (vs expected 32.5 billion).  US stocks continue to climb, with the Dow up to 10,290.

In economic news yesterday, Initial Jobless Claims for the Week ended 11/7 fell by 12,000 (vs expected no change).  Also the $16 billion 30 year note 3rd leg of the US Treasury's $81 billion in auctions for the week had softer demand than expected.  The bid/cover ratio was 2.26 and the yield was 4.469%.

Today's market update covers both Thursday 11/5 and Friday 11/6. 

Yesterday the bond market improved in the afternoon following the 3rd Qtr Productivity and Unit Labor Cost Report.  Productivity soared to a 9.5% increase and unit labor costs fell by 5.2%.  Analysts view these #s as showing that in the short-to-medium term labor cost inflation is not an issue.  Earlier in the day yesterday, the Initial Jobless Claims for the week ended 10/31 were released. Those showed initial claims dropped by 18,000 which was a bigger drop than the 6,000 expected.

This morning, the bond market initially improved and then worsened and then improved in volatility surrounding the October Non-Farm Payroll report.  190,000 jobs were lost and the unemployment rate increased to 10.2%.  The 190,000 # was not too far from expectations in the 175,000 range.  The 10.2% unemployment rate was higher than expected. However, the September Non-Farm job losses originally reported at 263,000 were revised down to 219,000 and August Non-Farm job losses were revised down to 154,000 from 201,000.

The bond market worsened slightly today but the impact is not seen in our rate sheets. If it does not improve in the morning, we will most likely see slightly worse rate sheets tomorrow. The Dow spent most of the day up above the 9800 level but ended the day up 76 points to 9789. This week's economic calendar is listed below. The big events for this week will be the Fed’s post meeting statement on Wednesday and October’s Non Farm Payroll Report on Friday.

Monday, November 02

September Construction Spending – moved up .8% vs expectations for a decline of .2%. August had been up .8%. Year over year spending is still down 13.0%.

October Institute of Supply Management Manufacturing Index – increased to 55.7 which was better than the 53.0 analysts had been expecting and the 52.6 in September

September Pending Home Sales – moved up 6.1% vs up 6.4% in August.

Tuesday, November 03

September Factory Orders – expected up 1% vs August down .8%

Wednesday, November 04

October Institute of Supply Management Service Sector Index – expected 51.6 vs September 50.9

ADP employment estimate – expected job losses of 190,000 for October in this report.

Fed concludes two-day Federal Open Market Committee meeting and issues policy statement – analysts will be watching carefully to see if the Fed changes their statement regarding keeping rates low for a “considerable” period of time.

Thursday, November 05

Initial jobless claims for the week ended 10/31 – expected down 6,000

3^rd Quarter Productivity and Unit Labor Costs – productivity expected up 5.5% vs 2^nd Qtr up 6.6%. Unit labor costs expected down 4.5% vs 2^nd Qtr down 5.9%.

Friday, November 06

October Nonfarm Payroll Report – expected job losses of 175,000, with the unemployment rate moving up to 9.9% vs last month 9.8% and the avg work week at 33.1 hrs vs last month 33.0 hrs.

September Wholesale Inventories – expected down 1% vs August down 1.3%.